Money And The Economy: Central Bankers' Views Moneta E L'economia. English

TABLES 6.1 Development of the cost of living in various countries, 1949-77 6.2 Overall economic developments, 1950-77 6.3 Movement of interest rates and monetary developments, 1950-77 13.1 Current account balance of payments of selected countries, 1974-8 13.2 Changes in real effective exchange rates, second quarter 1973 to fourth quarter 1974 ## Preface Those who interface with reality from within the institutions responsible for economic policy often feel that academics tend to abstract and commentators to oversimplify. None the less, it is widely recognised that economic analysis in the domain of central banking may be on a course which, though not actually wrong, is probably less fruitful than in the not-so-distant past. It has become more difficult in both the teaching and the popularisation of economics to give an accurate picture of the potential benefits of a credit policy and of the obstacles encountered in its implementation. The idea for this anthology developed, and was tested, in a series of lecture-meetings with students of economics in various universities and with bank officials who had recently completed academic studies. It grew out of the hypothesis that reading material other than the average monographic essay and the even more typical macroeconomics textbook can help to form a balanced critical view, especially in those who are preparing to face the complexities of monetary economics. In any case, it seemed well worth making some of the writings of central bankers more readily available by bringing together essays, often neglected and difficult to find, which are in themselves of considerable interest. The promptness with which the authors agreed to have their essays reprinted and where appropriate and possible enriched by the addition of an unpublished retrospective comment, allowed the idea to be put into practice. The editor is particularly grateful to Professor Paolo Baffi for his generous encouragement and advice in the planning ofthe book. Fausto Vicarelli and Filippo Cesarano commented on a first draft of the introductory essay, and John Smith successfully sought to conserve the significance of the Italian essays in his translation. Responsibility for any remaining imperfections and for the general design of the collection lies, of course, with the editor. PIERLUIGI CIOCCA X J. S. Mill's monetary theory was also eclectic, and this is partly why his Principles reigned unchallenged as the economist's bible until those of Marshall became widespread in the 1890s. 40 In his exposition, Mill moderated quantity theory by contemplating the possibility This report, aimed at the elimination of inflation and restoration of the international gold standard, pinpointed the central bank's discount rate (Bank Rate) as the proper weapon. In advocating the use of Bank Rate, the Cunliffe Report concentrated not, as might 'classical model'). Hicks himself has had to admit his dissatisfaction with this tendency, which has been especially evident in applied economic analysis. 72 Rather than listing a series of bad textbooks and mediocre theoretical and empirical studies, it is probably more profitable to see how these works have generally treated the liquidity-preference function, the linchpin of Keynes's monetary analysis of interest. The theory of Markowitz and Tobin was intended to explain portfolio diversification between money and variable price assets. 73 The explanation was based on preferences for the expected yield and the risk, in a range of choice defined by a given distribution of the probabilities of According to Friedman, our ignorance, which is primarily empirical and almost impossible to overcome, concerns primarily the channels, manner and timing of money's influence on expenditure and the distribution of changes in nominal income between quantity and prices in a way that is consistent with the need to avoid divergences of the real wage, the interest rate, and hence employment, from their 'natural' values. These 'natural' values are inherently changeable and unknowable. However, according to Friedman, confidence in the ability of economic agents and markets to behave 'as if general equilibrium theory were consistent and demonstrated in every part justifies confidence in the internal stability of the system. Equilibrium values, of both prices and output, will tend to prevail and, even though they cannot be perfected with counter-cyclical economic policy devices, they will prove to be socially acceptable in the long run. Monetary policy therefore cannot 'peg these real magnitudes at predetermined levels' and must stop trying to do so. 89 It has, instead, a triple task: '[to] prevent money itself from being a major source of economic disturbance' as had all too often been the case in the past; 90 '[to] contribute to offsetting major disturbances in the economic system arising from other sources' -the large-scale non-monetary disorders such as 'an independent secular exhilaration', 'an explosive federal budget' or 'the end of a substantial war'; 91 to ensure that the quantity of money grows at a steady pace that 'would on the average produce moderate inflation or moderate deflation' , 92 by providing 'a monetary climate favorable to the effective operation of those basic forces of enterprise, ingenuity, invention, hard work, and thrift that are the true springs of economic growth. That is the most that we can ask from monetary policy at our present stage of knowledge' . 93 Having cut the need for discretion in monetary matters down to size, Friedman also draws on considerations of a political and Banking (London: Longman, Green, 1932) pp. vi-vii. 2. The central bank was founded in Sweden in 1668, in England in 1694, in France in 1800, in Holland in 1814, in Austria in 1817, and in Belgium in 1850. The Reichsbank (since 1957 the Bundesbank) was set up in 1875, the Bank of Japan in 1882, the Bank of Italy in 1893 and the US Federal Reserve System in 1913. Among the many works in this field, see the summary comparative study by M. Fanno, Le banche e il mercato monetario (Rome: Athenaeum, 1912); see also V. C. Smith, \*This chapter originated as the 1966 Per Jacobsson Lecture. given in Rome on 9 3 The Functions of the Central Bank in Today's Economy\* Carlo A. Ciampi \* This chapter originated as the 1979 Per Jacobsson Lecture. given in Belgrade on 30 \*This chapter was originally presented by Lord 0" Brien under the same title as the Front Matter....Pages i-x Introduction Between ‘a Science’ and ‘an Art’: Central Banks and the Political Economy of Money....Pages 1-44 Front Matter....Pages 45-45 Some Thoughts on Central Banking....Pages 47-56 The Role of the Central Banker Today....Pages 57-78 The Functions of the Central Bank in Today’s Economy....Pages 79-91 Front Matter....Pages 93-93 The Contribution of the Banking System to Monetary Equilibrium and Economic Stability: Italian Experience....Pages 95-119 ‘Noise’....Pages 121-125 Thirty Years of the Deutschmark....Pages 127-146 The Anguish of Central Banking....Pages 147-166 Central Banking with the Benefit of Hindsight....Pages 167-183 Front Matter....Pages 185-185 Banks and Economic Policy....Pages 187-196 The Banking Act 1979....Pages 197-213 Why Banks Are Unpopular....Pages 215-230 Central Banks as Regulators and Lenders of Last Resort in an International Context: A View from the United States....Pages 231-242 Front Matter....Pages 243-243 The International Capital Market and the International Monetary System....Pages 245-261 The European Monetary System and Italian Participation....Pages 263-276 Foreign Capital and Domestic Planning....Pages 277-297 Monetary Policy, Capital Movements and Underdevelopment....Pages 299-312 Back Matter....Pages 325-331